ESSAYS ON EMPIRICAL WELFARE ECONOMICS

Chapter 1 Over the last decade we have witnessed an improvement in the literature on how to measure and compare the well-being of individuals. While the standard approach in the analysis of individual well-being is based almost exclusively on a material dimension of income, there is a robust evidence that individuals care about non-income dimensions of life which accordingly should be included in such a measure. Nevertheless, even when the non-income dimensions of life are included in the analysis of individual well-being, a majority of studies are predominantly neglecting the notion of individual preferences in order to escape the problem of interpersonal comparisons of well-being. In this chapter we have employed an alternative welfare measure which takes into account income and non-income dimensions of life while at the same time the following measure is sensitive to the individual preferences. This is known as the equivalent income measure. We have compared the equivalent income and income measures over 25 countries of the European Union. The following analysis is done for 2007 and 2011, since these were the only available years that we could use. Our contribution to the literature is reflected in the fact, that to the best of our knowledge, there are no such studies in the literature that compares the well-being with the following two measures for such a large set of countries. Although we found that the welfare rankings across countries change to some extent between the average income and average equivalent income, in spite of that when we ranked countries according to the growth rates of income and equivalent income we observed a substantial change in the country rankings. The following evidence implies that the choice of the welfare metrics is empirically important. The previous results have been broadened by computing the welfare rankings across countries once we raise the concern about the egalitarian principle of justice. We observed that the welfare rankings across countries changed remarkably when we take into account distributional inequalities. The evidence we have found suggest that correlations of disadvantages between life dimensions matter since some countries have sufficiently larger inequalities of equivalent income than inequalities of incomes. The results we have found show that individuals across countries care about material dimension (income) but they also care much about the non-income dimensions. Relatively the most important non-income dimension for almost all countries is health while the least important non-income dimension concerns the (un)employment status. We have identified the worst off individuals according to each welfare measure and we have compared the socio-demographic characteristics of the worst off individuals. We have seen that different well-being measures will identify the worst off individuals with different socio-demographic characteristics. We have also observed that the worst off individuals considerably differ over countries with respect to their average income and non-income dimensions and average socio-demographic characteristics. Finally, we have illustrated the degree of re-ranking between income and equivalent income measures taking into account all individuals of a given country. While we found a similar pattern of re-ranking between income and equivalent income across countries, the degree of re-ranking differs across countries. The pattern that we have observed across all countries indicated that individuals who are income rich can end up as equivalent income poor while the opposite has not been found.